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Canadian Oil Patch Shrugs Off Trumps Trade War Threat

Despite the recent flight of investment from the west Canadian tar sands, Canada hasn’t deviated from its course and continues to embrace major energy projects, particularly the ones designed to facilitate exports to the United States. And while U.S. President Donald Trump slaps tariffs on imported Canadian wood and threatens economic warfare with the single largest U.S. trade partner, energy links between the United States and Canada are solidifying.

According to an EIA report, owners of the Alliance pipeline, a 2400-mile natural gas line carrying unprocessed natural gas from production sites in Alberta and British Columbia to extraction and fractionation plants near Chicago, are planning an expansion. They hope to add 0.5 bcf/d of capacity to the line, which at the moment has a capacity of 1.6 bcf/d, for a total throughput of over 2 bcf/d by November 2020.

The demand for natural gas plant liquids (NGPL) derived from wet natural gas is low in Western Canada, particularly now that tar sands activity looks to be falling off, so Alliance is betting on greater demand in the United States. From its plants near Chicago, Alliance can send products to the Alliance Chicago Exchange and thence to other pipelines accessing other markets. If interest from investors is sufficient for the pipeline expansion, Alliance will accept bids in fall 2017, though it is not yet known how much the project will cost.

On April 20, Calgary-based electricity provider TransAlta announced it would be phasing out eight coal-fired power centers and converting six of them to natural gas by 2023. The transition would cost around $CA300 million and cut emission between 30 and 40 percent per megawatt hour, but the principal reasons for the transition are economic and political. Alberta announced a mandatory phase-out of coal-fired power plants in 2015, mandating the existing plants would be shut down or transitioned by 2030. Coal has also become uncompetitive compared to natural gas and renewables, further encouraging the transition.

A significant amount of Canada’s natural gas production, roughly one-third by one estimate, is used to produce oil from the tar sands. That sector has seen its fortunes dip in recent years, as high costs and low prices push out major companies. In the last year, five major companies have sold off assets worth $25 billion, with ConocoPhillips joining the exodus in March: the company sold off $13.3 billion in assets to Cenovus.

Now BP is considering a departure, as it shifts money away from non-core businesses. The British energy company owns stakes in three different tar sands plays and is considering shifting its attention towards more profitable areas, such as the Permian Basin in the U.S., according to Reuters.

Consequently, the re-investment rate into tar sands projects has fallen to nearly 50 percent, though optimists see signs of a resurgence ahead. Tar sands oil production has come under more intense political pressure in Canada, as environmental concerns and public discomfort with major investments into energy production has caused support for the project to dwindle. That, combined with the high cost of tar sands production relative to other North American areas, particularly the Permian Basin, has fueled the recent exodus.

Yet most of the companies buying up the assets for sale are Canadian firms, looking to replace the majors. While there are impediments to further tar sands production for now, the area still represents the third-largest energy reserve in the world, after the oil fields of Venezuela and Saudi Arabia. The smaller Canadian firms replacing ConocoPhillips, Shell and other major companies are hoping that higher prices and renewed interest will allow a resurgence in tars sand production further down the road.

Diminishing expectations in the tar sands shouldn’t distract from the fact that Canada will be the fifth-largest producer of crude oil in the world in 2017. The complex industry in the western provinces of Alberta and British Columbia, where pipelines crisscross the country and heavy crude is interspersed with lighter blends, has only expanded in size. Despite outages last year, oil sands production reached 2.4 million bpd in 2016, much of it bitumen and light-synthetic crude.

From total Canadian production, roughly 3.8 million bpd is exported south to the United States, which imports more oil from Canada than any other nation. Canada accounts for nearly 40 percent of total U.S. oil imports. Increasing U.S. production may cause that number to slip, but the demand for heavier Canadian crude blends is likely to remain high, particularly if excess US production is prepared for export rather than fed into domestic consumption. Canada imports about 865,000 bpd from the United States, down from nearly 1 million bpd in 2015.

There’s little reason to expect the energy links between Canada and the U.S. to disappear any-time soon. As each country expands its energy profile and embraces new production both for domestic consumption and export, bonds will grow tighter, even if political roadblocks occasionally appear.

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